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Retirement Plan Loophole
By: Dallas L. Salisbury
Tax-free transfers
Little-known retirement plan loophole: Employees of schools and nonprofit organizations can transfer from an employer's 403(b) retirement plan-similar to a 401(k)-to a self-directed 403(b) plan tax-free under an obscure IRS ruling (Revenue Ruling 90-24). Many employer 403(b) plans offer limited investment choices (usually fixed or variable annuities), high fees and mediocre performance. In 1990, the IRS ruled that the transfer of all or part of a 403(b) to a self-directed 403(b) would not be treated as a taxable distribution even for those under age 591Ú2.
Important: Check plan documents to see if transfers while you are employed are permitted-the fact that the IRS allows this doesn't mean that your plan will. If you can make the transfer, set up a self-directed 403(b) plan at a brokerage firm and have your money transferred directly to it to avoid paying tax on the transfer.
Warning: If your account holds annuities, wait until surrender charges-typically for cashing out before a five- to seven-year period -have expired before transferring money. Ongoing contributions still will be made to your employer's 403(b) plan, so you'll need to transfer additional assets periodically, subject to plan rules.
